The panic that accompanied the collapse of the biotechnology sector’s bank of choice ebbed Sunday when the federal government moved to protect all depositors of Silicon Valley Bank.
The muscular intervention allayed the fears of the many young biotech companies that had banked with SVB, ensuring they could access their money to pay employees and fund operations.
However, the fallout of SVB’s implosion could linger longer. The government hasn’t found a buyer for SVB, leaving the fate of the bank, its employees and the relationships it built with biotech hanging in the balance. Federal regulators have only guaranteed deposits, which could still leave some biotechs in other financial predicaments. Meanwhile, entrepreneurs and their venture backers, shaken by the largest U.S. bank failure in nearly 15 years, are recalculating how they’ll handle their finances going forward.
Will another bank become the new SVB for biotech?
To the people who form, fund and advise young drug companies, SVB wasn’t just another regional bank. Over four decades, it had established a reputation as a friendly lender and partner for up-and-coming biotechs. SVB “was the cool startup bank,” said Ethan Perlstein, founder of biotech Perlara. “I would ask all my friends in biotech, ‘Where do you bank?’” and the answer was almost always SVB, he added.
A major reason for SVB’s centrality to the sector was its willingness to lend money to early-stage companies on “better terms than a traditional bank would offer,” said Chris Miller, a partner at the law firm Troutman Pepper, who works on private financing deals. SVB also had a “close connection” with investors, he said, so it became a preferred parking spot for the seed funding startups raised as well as the larger rounds they later received.
“Before we raised funding, SVB already had a dedicated team for me and helped me with the concept,” said Li Sun, a former venture capitalist at Foundation Capital and the founder of startup Shennon Biotechnologies.
SVB’s own data bears that out. The bank claimed to have a relationship with more than half of the healthcare companies that raised a venture round since 2021 and three-quarters of the companies that went public. Since its closure, more than 600 venture firms have signed a petition vowing to do business with SVB in the future if it’s “purchased and appropriately capitalized.”
That isn’t a sure thing. Miller noted how many biotech companies worked with SVB because of personal relationships. Key people behind those relationships may not be retained or could leave once SVB is sold. Their clients could follow them to their new jobs. The terms offered to startups by SVB’s acquirer might also be different from what SVB historically set.
“The reality is, it's not going to be the same,” added James Stevens, head of Troutman’s financial services industry group. Another bank, or a combination of several, may therefore have to fill the hole left by SVB.
What will happen to SVB credit lines?
Companies’ biggest fear over the weekend was whether they could access their SVB deposits on Monday. The concerns sparked a “mad scramble” to secure short-term loans to replace the frozen funds, Miller said. In many cases, those plans were abandoned once the government intervened, he added.
Yet biotechs with lines of credit from SVB could still be in a tough spot. Stevens noted how companies aren’t allowed to draw on revolving loans while the government is running the “bridge bank” it created to hold SVB’s assets. That bank “isn’t looking to grow the balance sheet by making additional extensions of credit under revolvers, or new loans,” he said.
Biotechs that rely on those credit lines could still face a cash crunch, particularly in a market environment that’s made fundraising harder for small drugmakers. Even if they stick with SVB and a buyer is found, it’s not clear whether that acquirer would pick up their loans on the same terms. “Are [biotechs] going to have to refinance?” Miller said, and if so “what terms are they going to get?”
To Stevens, this puts pressure on the government to sell SVB quickly. The bank’s assets will dwindle in value if companies get new credit lines elsewhere, he said. However, if a buyer emerges soon and keeps biotechs’ loans intact, it could “get into [the startup] space in the biggest way possible immediately.”
Will biotechs and investors change how they handle their money?
Biotech founders and investors say SVB’s collapse has taught them to spread their money across multiple startup-friendly banks, rather than relying on only one.
“We’ve all been taught an acute lesson about the need to diversify,” said Michael Gilman, the CEO of Arrakis Therapeutics.
Dusan Perovic, a partner at venture firm Two Sigma Ventures, said that, going forward, startups will increasingly have multiple banking relationships.
They may also opt to hold funds in government securities, or limit account balances above the $250,000 threshold covered by the Federal Deposit Insurance Corporation. (Although questions of whether the government’s decision to make whole all SVB depositors may change perceptions of what’s protected.)
Perlstein is already switching strategies. His company, Perlara, had funds temporarily trapped in SVB and he’s now considering a variety of other banks, but likely won't settle on just one.
“A generation of founders is now scarred,” Perlstein said. “Going forward, I’m never going to assume I should trust a bank. I’ll definitely keep multiple accounts. Now you know why cells have two copies of a chromosome.”
Finding a new bank, or simultaneously working with several, can be a headache, though. Some loans require borrowers to keep their deposits in the same institution, for example, making it trickier for companies with debt to hedge their risk, according to Miller.
The task also could make building a biotech startup harder and more expensive, as companies might have to hire CFOs earlier or shore up their banking strategy right away, Perlstein said.
Others were more reflective of the role they play, too. Shennon, which announced a $13 million seed financing Monday, had just under $3 million in an SVB account, CEO Sun said. But as many of her peers rushed to pull money out, she stood her ground.
“I feel like the lesson learned is that you need to have more faith in banks that provide us with this service in this system,” Sun said.